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That question, in some form, will keep vexing municipal-bond investors and issuers alike until Congress decides on some combination of tax hikes and spending cuts. For now, a change to muni tax treatment is seen as a plausible outcome of deficit-reduction negotiations ahead of January's "fiscal cliff."

Any changes probably would accompany a jump in the top income-tax rate to 39.6%, from 35%, as well as spending cuts that could imperil economic growth. But since nobody knows how things will play out, investors are hard-pressed to take any action yet.

"This could take two completely different paths, and there's really no way to handicap this right now," says Ben Thompson, CEO of Samson Capital Advisors. "The higher tax rates would ironically help muni bonds, but the backdrop would be an extremely weak [economy], which would pressure municipal credit quality."

For now, investors should at least familiarize themselves with some of the proposals. The most-discussed one, floated in last year's American Jobs Act, involves capping the value of tax-exempt interest—munis' main selling point—at a 28% tax rate. If the maximum income-tax rate did indeed go to 39.6%, munis would be taxed at 11.6% (39.6% minus 28%).

So, investors could face a double whammy. Their tax rate might go up, and the percentage of muni interest they could claim as an exemption could decline.

There's also a proposal to cap the total dollar amount of deductions and exemptions. "In our view, the potential pressure on the muni market from this latter type of provision would be more severe than that from a cap on the maximum effective tax rate on deductions and exemptions," Citi strategists write. "This type of provision would, in effect, severely constrain the amount of tax-exempt bonds any individual can own."

Further complicating matters, Citi says: There's no clarity yet on precisely what constitutes tax-exempt income under current proposals. Is it coupon income? Amortized yield? Something else?

Already at risk is the federal interest-rate subsidy for Build America Bonds, a separate class of taxable munis conceived after the financial crisis began, to expand the lender base for stressed state and local governments. That subsidy, the cornerstone of the BABs market, could be reduced as part of the mandatory cuts under the fiscal cliff's doomsday "sequestration" provision.

Other variables involve whether old munis would be subjected to new tax rules or grandfathered in under existing ones, and whether tax-code changes would be applied equally to all muni bonds or differently to ones issued for special purposes, such as hospitals or housing.

Muni investors and issuers complain that their market is being picked on, despite myriad challenges already facing state and local borrowers, as well as the undersize comparative benefits of targeting muni tax treatment, rather than other, larger loopholes. But munis are a much more politically plausible target than, say, telling millions of American homeowners that their mortgage-interest payments suddenly aren't deductible.

Has the muni market started pricing in any likely January outcomes?

Unfortunately, even that's hard to tell, because investors have been pouring so much money into munis all year that it's nearly impossible to pinpoint other forces that might be influencing prices. Muni mutual funds and exchange-traded funds have had net inflows in 47 of the past 49 weeks. Last week, the inflows hit $1.8 billion, about three times the weekly average this year, even as muni yields reached all-time lows.

TREASURY-BOND YIELDS edged a bit higher last week, but remain firmly range-bound ahead of January's fiscal-cliff deadline. The 10-year yield rose to 1.693% Friday, from 1.581% a week earlier, and the 30-year yield advanced to 2.829%, from 2.749%.